The informal sector is an extensive phenomenon in developing countries. While some
of its implications have drawn considerable attention in the literature, one relatively
unexplored aspect has to do with the saving patterns of workers and firms and how
these might influence aggregate savings and wealth inequality. This paper aims to fill
that gap by examining both entrepreneurs’ and workers’ choices regarding whether to
perform informally and regarding asset accumulation. Specifically, the paper builds
an occupational choice model wherein saving is primarily motivated by precautionary
considerations. The model features labor and capital market segmentation, and it is
calibrated to replicate the saving rates, wealth inequality and composition of occupations
across the formal and informal sectors of Colombia. Computational experiments
additionally make it possible to analyze the effects of highly debated formalization
policies on wealth redistribution and promotion of saving and entrepreneurship. Alternative
frameworks are finally considered.